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U.S. Services Economy Cools in September as Business Costs Rise Again
Editorial note: This is original analysis based on data published by the Institute for Supply Management (ISM) and reporting from Reuters. Smart Travel Finance did not conduct the survey. Nothing here is investment, tax or personalized financial advice.
The U.S. services economy kept growing in September, but two measures moved in opposite directions. Activity cooled slightly: the ISM Services PMI slipped to 54.9 from 55.4 in August. Costs heated up: the ISM Prices Index climbed to 74.0, its highest reading since July 2022. A sector that accounts for more than two-thirds of U.S. economic activity is still expanding, and businesses in it are reporting that they are paying more to do so.
That pairing makes the September report harder to label than a simple "strong" or "weak." Below, we break down the numbers, explain what the Prices Index does and does not measure, and look at what the data could mean for households, businesses and policymakers.
- Services PMI: 54.9 in September, down from 55.4 in August, and above 50 for a 27th straight month
- New Orders: 59.8, down from 60.9, so demand remains solid
- Employment: 50.1, up from 47.8, back above the 50 line for the first time in three months
- Prices Paid: 74.0, up from 72.6, the highest reading since July 2022
- The takeaway: expansion and cost pressure at the same time. One monthly report is a data point, not a trend
The U.S. Services Economy Is Still Expanding
The ISM Services PMI is built from a monthly survey of purchasing and supply executives. Respondents say whether conditions at their organizations are better, the same or worse than the month before, and the answers are converted into diffusion indexes. A reading above 50 means more respondents report expansion than contraction; below 50 points the other way. The headline PMI averages four of those indexes: business activity, new orders, employment and supplier deliveries.
September's 54.9 is 0.5 point lower than August and a touch below the 55.2 that economists polled by Reuters had expected. It is still firmly in expansion territory: ISM counts it as the 27th consecutive month above 50, and it sits slightly above the index's 12-month average of 54.1. Thirteen industries reported growth in September, while four reported contraction.
Don't mix up the surveys
The ISM Services PMI and the S&P Global services PMI are separate surveys with different panels and methods. Their readings are not interchangeable, so ISM should be compared with ISM.
| Index | Sept. | Aug. | Change | Plain-English reading |
|---|---|---|---|---|
| Services PMI | 54.9 | 55.4 | −0.5 | Overall services activity; above 50 means expanding |
| Business Activity | 56.5 | 61.7 | −5.2 | Output is still rising, but less broadly than in August |
| New Orders | 59.8 | 60.9 | −1.1 | Customer demand remains solid |
| Employment | 50.1 | 47.8 | +2.3 | Staffing conditions moved back above 50 |
| Supplier Deliveries | 53.2 | 51.3 | +1.9 | Above 50 means slower deliveries |
| Prices | 74.0 | 72.6 | +1.4 | Businesses report paying more for inputs |
Source: ISM Services PMI Report, September 2026, released October 5, 2026.
The softer spot was business activity, which dropped 5.2 points to 56.5 after a strong August. New orders eased too, but they remain strong; Reuters noted that August's 60.9 was the highest reading since February 2023. ISM adds that, based on past relationships, a Services PMI of 54.9 corresponds to roughly 2.1% annualized real GDP growth. That is a historical relationship rather than a forecast, but it underlines the point: this is not a contraction story.
Tap an Index to See What It Says
Each tab shows September's reading, the change from August and what the index is designed to capture.
Figures from the ISM Services PMI Report for September 2026. These are survey-based indexes, not official government statistics.
The Number Getting the Most Attention: Prices Paid at 74.0
The ISM Prices Index rose to 74.0 from 72.6 in August. That is the highest reading since July 2022, when it stood at 74.5, and it extends a long run: ISM says the index has stayed above 60 for 22 straight months and has topped 70 in six of the past seven. Its 12-month average rose to 69, the highest since March 2023. Reuters described the reading as the highest in more than four years and noted that it mirrored a similar increase in the ISM's manufacturing survey.
Here is what the index actually measures. It asks purchasing executives whether the prices their organizations pay for materials and services are higher, the same or lower than a month earlier. In September, 50.3% reported paying more, 47.5% saw no change and 2.2% reported paying less. ISM said 17 industries reported higher prices and none reported lower. A reading of 74.0 therefore signals that price increases were widely reported, not that prices rose by 74%.
An important distinction
The Prices Index is not the inflation rate. It is a survey-based diffusion index showing how widespread price increases are among businesses buying inputs. The consumer price index, by contrast, tracks the prices urban consumers pay for a basket of goods and services; the Bureau of Labor Statistics reported it rose 3.4% over the 12 months through August. The two can move in the same direction, but one does not convert directly into the other.
Why Businesses Are Feeling More Cost Pressure
The ISM report points to two issues above all others. Tariffs and fuel costs were the most cited factors affecting supply chains, and ISM said fuel costs were mentioned twice as often as any other single issue. Fuel was reported higher in price for an eighth straight month, with diesel, gasoline and other petroleum-based products on the list. For the energy backdrop, see our coverage of recent oil-price pressure.
Reuters tied part of the pressure to strong domestic demand stretching supply chains, and noted that the U.S.-Israeli war with Iran has pushed up energy prices and disrupted some commodities shipped through the Strait of Hormuz. Delivery times add to the picture. The Supplier Deliveries Index rose to 53.2 from 51.3, the 22nd straight month above 50. It is unusual among ISM indexes because a reading above 50 means slower deliveries, which often accompanies strong demand and strained supply.
The number of commodities reported in short supply rose from six to seven, with switchgear and computers and related products among the additions. Steel products, copper, wire and cable, and memory products were among items reported higher in price. Respondent comments, which we paraphrase rather than quote, mentioned freight and fuel surcharges, higher overseas container costs, software licensing renewals and wage pressure.
Imports are part of this chain. ISM's Imports Index was 52.9, a third straight month in expansion territory. For a California view of goods moving through the system, see our report on record U.S. import activity at the Port of Los Angeles.
Illustrative graphic created for Smart Travel Finance. Educational purposes only; not affiliated with ISM, Reuters or any government agency.
What Happened to Employment?
The services Employment Index moved to 50.1 from 47.8, back above the 50 line that divides expansion from contraction for the first time in three months, according to ISM. In plain terms, 16.5% of respondents reported higher employment and 16.2% reported lower, a slight tilt toward adding staff after two months in contraction territory.
That is not proof of a hiring boom. ISM's industry breakdown was split: seven industries reported higher employment while eight reported lower. The report also lands against a mixed backdrop: Labor Department figures released October 2 showed payrolls rose by just 29,000 in September while the unemployment rate edged up to 4.2%. Different surveys capture different things — the ISM Employment Index reflects business conditions, while the New York Fed survey on consumer job concerns captures household expectations. Neither is a substitute for the other.
What This Could Mean for American Consumers
Higher input costs do not land on a household budget directly. They move through a chain: businesses pay more for fuel, freight, materials and software; that raises operating expenses; managers then decide whether to absorb the cost, find savings or adjust prices and fees. Whether any of it reaches customers depends on competition, demand, margins and productivity.
How a Business Cost Could (or Could Not) Reach a Customer
Tap each step in the chain, then tap a factor to see what could limit pass-through. This is a simplified illustration, not a forecast.
What could limit the pass-through
Educational illustration only. It does not predict prices for any company or service.
Some services are more exposed than others. Businesses that rely heavily on fuel and freight, such as restaurants and food service, transportation and logistics, and travel-related services, tend to watch these costs closely. Professional, retail and housing-related services may feel pressure through wages, software, materials or property-related expenses.
None of this means every company will raise prices. Firms facing strong competition may hold prices and accept thinner margins, others may offset costs through productivity gains, and some may pass through part of an increase. California is a useful reader lens because its economy leans heavily on services, but the national ISM report does not measure California separately, so this article makes no California-specific price claims.
For households, the practical takeaway is awareness rather than alarm. Tracking recurring service costs month to month makes it easier to see whether real changes are showing up in your own spending. Our California monthly budgeting guide offers a simple framework for doing that.
What It Means for the Federal Reserve
The September report adds to a policy debate that was already delicate. The Fed raised its target range for the federal funds rate by a quarter point to 3.75%–4.00% on September 16, its first increase in three years. Reuters reported that the combination of solid activity and higher business costs fits economists' view that the central bank could consider another increase in December, while recent inflation readings and September's weak payroll growth had already reduced the chance of a move at its October 27–28 meeting. Those are economists' interpretations, not Fed decisions. Smart Travel Finance does not forecast policy. For earlier context, see our earlier analysis of U.S. inflation.
How This Fits With Other U.S. Economic Data
Set beside other recent releases, the picture is mixed rather than uniformly strong or weak:
Growth
ISM services is still expanding, and Reuters said the PMI remained consistent with strong economic growth in the third quarter.
Labor
Government payroll gains were weak at 29,000, while the ISM survey showed services hiring edging above 50. See our recent U.S. private payroll data.
Prices
The ISM Prices Index is elevated. Separately, the BLS reported consumer prices up 3.4% over 12 months through August.
Policy
The Fed raised its target range to 3.75%–4.00% in September and meets again October 27–28.
What to Watch Next
- The October ISM Services PMI, scheduled for Wednesday, November 4, 2026, at 10 a.m. ET
- The Prices Index: whether it stays above 70 or drifts lower
- Fuel and diesel prices, since fuel was the most-cited cost issue in September
- Supplier deliveries: whether readings above 50 persist
- New orders: whether demand holds near current levels
- Services employment: whether the index stays above 50
- Future inflation and employment reports
Bottom Line
The services economy is not contracting. The Services PMI is 54.9, new orders are 59.8 and the Employment Index has edged back above 50. What changed in September is the cost side: a Prices Index of 74.0 is the highest in more than four years. That divergence between continued expansion and renewed cost pressure is the real story. One monthly report does not establish a long-term inflation trend, and the next few reports will show whether September was a spike or the start of something more persistent.
Frequently Asked Questions
What was the U.S. Services PMI in September 2026?
The ISM Services PMI registered 54.9, down 0.5 point from 55.4 in August. A reading above 50 indicates the services sector is generally expanding, and ISM counted September as the 27th consecutive month above 50.
Why is the 74.0 Prices Index important?
It is the highest reading since July 2022. The index tracks how widespread price increases are among businesses buying materials and services. It is not the consumer inflation rate.
Does a PMI above 50 mean the U.S. economy is growing?
It means the services sector is generally expanding. ISM says a Services PMI above 48.1 has, over time, been consistent with overall economic expansion.
Does rising services input costs mean consumers will definitely pay more?
No. Businesses may eventually pass some costs through, but that depends on competition, demand, margins and productivity.
What should consumers watch after the September 2026 services report?
The next ISM Services PMI on November 4, upcoming consumer price and jobs reports, fuel and diesel prices, and the Fed's October 27-28 meeting.
- Reuters (Lucia Mutikani), "US services sector cools in September, price pressures building," October 5, 2026: reuters.com
- Institute for Supply Management, September 2026 Services PMI Report: prnewswire.com
- Federal Reserve, FOMC statement of September 16, 2026: federalreserve.gov
- Bureau of Labor Statistics, Consumer Price Index, August 2026: bls.gov/cpi
This article is original analysis based on the reported data. Smart Travel Finance did not conduct the ISM survey or obtain non-public information. Figures reflect the sources as of October 5, 2026.
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